MF Global clients can't bank on Lehman’s Supreme Court verdict

A leading financial services lawyer has warned MF Global clients not to pin too many hopes on a UK Supreme Court decision which extends the definition of segregated client money beyond segregated accounts.

A leading financial services lawyer has warned MF Global clients not to pin too many hopes on a UK Supreme Court decision which extends
the definition of segregated client money beyond segregated accounts.

The landmark Supreme Court case has shed light on the status
and distribution of client funds by US investment bank Lehman Brothers and has
implications for MF Global clients who are missing money from their accounts
months after the futures broker went bust.

At issue was the position of client money that failed to
make it into Lehman’s segregated client accounts at the time the firm went
bankrupt on 15 September, 2008.

“The judgment should open the door to some clients seeing
additional cash released from MF Global, including those with outstanding
segregation requests and margin,” said Sean Donovan-Smith, a senior associate
at London-based law firm Speechly Bircham. “But this decision should not be
interpreted too widely. It doesn’t mean all client money – no matter where it
is located – can now be retrieved.”

While in the UK client funds are required to be segregated
in separate accounts, Lehman operated an “alternative approach” for holding
client funds, where monies were paid into the firm’s house accounts and then
segregated into client accounts later. Under this arrangement, funds were not
paid directly into client accounts and some client funds remained in the house
accounts when Lehman went into administration.

The UK Supreme Court has upheld a Court of Appeals decision
that means money which did not make it into segregated accounts can nonetheless
be deemed segregated client funds and therefore pooled for return to account
holders.

The judgment impacts MF Global clients in the UK who are yet to be compensated for money lost which should have been in segregated
client accounts.

“This is good news and everyone welcomes the clarity. The
administrators of both Lehman’s and MF Global can now move forward with the
resolution of numerous outstanding client money claims,” said Donovan-Smith.
“But other issues still need to be resolved, like the effect of MF Global’s
standard terms of business and identification of client money in its house
accounts.”

Donovan-Smith said the Supreme Court’s ruling provides three
important rules for client money protection: protection applies from the point
when client money is received; if client money is identifiable in any account,
it must be pooled; clients share the client money pool on a claims basis,
irrespective of whether they contributed to the client money pool.

As authorities look for missing MF Global customer cash in
the order of US$1.6 billion, US futures exchange CME Group said it now
planned to let swaps traders keep collateral with a third party. The move is
aimed at providing increased protections.

In early February, MF Global’s UK special administrator
KPMG, began returning client money but was unable to continue the process
until the Supreme Court ruling.

MF Global’s US bankruptcy trustee, James Giddens, is
fighting KPMG, asserting around US$740 million of the UK funds should be
repatriated for American customers.